Yahoo: Bringing Geeky Back

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Overturning "Innovation Constipation"

Yang is drawing on his background as a Stanford-trained engineer to galvanize the rank and file and make Yahoo a safe place to be a geek again. It's a tall, much-needed order. Semel made Yahoo into the online media giant it is today in part through his own reengineering of its culture. The Warner Bros. veteran pushed employees to focus on profitability, sealing lucrative business deals and securing the kind of content capable of attracting large audiences and advertisers—instead of toying with unproven technology ideas.

Though Semel's discipline proved just what the company needed at the time, Yahoo employees say the company is now overly cautious when it comes to launching new products or experimenting with concepts that do not have a proven business model. McAlister describes Yahoo's problems as "innovation constipation" and "analysis paralysis." In a blog post last year, McAlister wrote that the company concentrates too heavily on identifying "all the potential pitfalls" of any decision and not enough time creating solutions. "Few people are willing to take a loss on one product or strategy on the chance that another one might yield a brighter future. The result is a wait-and-see approach," wrote McAlister. "That's a shame given the incredible potential here."

Socially Awkward

Many inside Yahoo have blamed that caution for its recent struggles. Competition is hammering Yahoo in the very areas where its own innovation is falling behind. Take Web search. Google has one-upped Yahoo in matching ads to search results, developing a significantly more profitable system. Yahoo also missed opportunities in social networking. With roughly 12,000 employees, including an army of engineers, Yahoo had the necessary resources to develop a vibrant social network long before Facebook or MySpace (NWS). Instead, it launched Yahoo 360, its social networking offering, in 2005, nearly two years after MySpace was founded. The service never really took off.

In September, the company launched an invitation-only trial of a new social networking site titled Yahoo Mash. "We have gone from self-admittedly having made missteps in the social space," says Yahoo's Garlinghouse, author of the critical internal document dubbed the Peanut Butter Manifesto that prompted louder calls for a shakeup. "This has been an area where we need to execute more effectively."

Turnaround Plan in the Works

Analysts question whether Yang can execute on his vision. "People just don't have the confidence that future growth will be as much as Google," says Jason Helfstein, an Internet analyst for CIBC World Markets. "They are not really sure that Yahoo can do much to get share back." Yahoo employees seem willing to give Yang the benefit of the doubt. Numerous executives interviewed in recent weeks said Yang's presence has inspired confidence across the company. "People believe in Jerry," says Garlinghouse. Adds Tapan Bhat, Yahoo's vice-president of front doors: "There is a tremendous amount of energy now."

Despite such moves, few are willing to proclaim Yahoo a changed company. Indeed, Yang was still a top executive while Semel held the CEO seat, prompting some to wonder what took him so long to agitate for change. And the company has made efforts to innovate throughout its history. Yahoo holds multiple "Hack Days," events where employees are encouraged to play around with Yahoo's systems and develop new features. Earlier this year, Yahoo launched Brickhouse, an ideas incubator dedicated to fostering the creation of innovative products. "Yahoo is still in the midst of developing its turnaround plan," said UBS (UBS) analyst Ben Schachter in a note to investors prior to Yahoo's earnings call. "There remain difficult operational issues."

Holahan is a writer for BusinessWeek.com in New York .